(Photo: Tim Boyle/Getty Images)
Ever wonder why we keep seeing on the evening news that more of us are once again frequenting the malls or clicking on those handy little “Buy Now” buttons online?
Meanwhile, our credit card balances are dropping at impressive rates. The answer is really quite simple – and likely not what you’d expect. First, though, take a look at some of the statistics and facts that are guiding these trends.
The Unsolicited Credit Cards
Yahoo! Finance reports a 14 percent increase in retail sales over the past twenty-four months while at the same time, outstanding credit balances have dropped 15 percent in this time frame. If you think we’re simply using cash more often, think again. It is true that the credit card companies are no longer sending unsolicited credit cards in the mail; in fact, in 2006, before the recession began, the collective credit card industry sent out close to 8 billion approvals for cards that no one applied for.
As a result, retail purchases quickly rose to 22 percent – and that’s not counting what the Federal Reserve refers to as non-revolving credit, such as your automobile loan. It’s indicative of revolving accounts, such as your credit card. Clearly those unexpected credit cards in the mailbox were used, even if they weren’t solicited.
Here’s where it gets interesting. After that surge, courtesy of those unsolicited credit cards that arrived in the mail in 2005, 2006 and into 2007, the outstanding money owed on credit cards began dropping. In fact, it’s steadily dropped by almost 18.5% since August, 2008. The total dollar amount went from $974 billion in July 2008 to $795 billion in January of this year.
And that’s not all – the total revolving debt in this country hasn’t been this low since 2004. So how can that be? And how does that mesh with the record number of foreclosures and near double digit unemployment numbers that are still occurring on a daily basis? At first glance, it would appear people are paying their credit card bills before the mortgage payments are made each month. Of course that’s not the case.
Actually, the answer is one we’ve all grown quite used to seeing and you can chalk it all up to those lost jobs. The profits and losses the banks and credit card companies present do not include outstanding balances that were filed as part of a bankruptcy or those accounts when the consumer simply stopped paying.
When a credit card company moves an account from “active” or even “past due” and into its “charged off” status, those balances are no longer included in the totals owed to that card company. That explains why spending continues to rise while credit card balances steadily drop. That 18.5% drop has far more to do with charged off accounts that were deemed not collectible.
The Disciplined Consumer
What’s really surprising in this dynamic is that by December 2010, more of us were doing a far better job of keeping up with our credit card payments. This played a role in the renewed hope many financial and banking analysts had for the economic outlook as a whole.
This might bode well for those who never took their eye off the proverbial ball and managed to prevent the frustration that comes with a ruined credit history. It could mean that if economic times once again take a turn for the worse, these consumers will likely be that much more disciplined when it comes to maintaining their payments and thus, their credit scores.
Credit card companies are realizing too that those same consumers who might have struggled three short years ago are in a much better – and wiser – financial position these days. Those uncertain days of not knowing if there would be a job to report to from day to day are beginning to be replaced with a more hopeful outlook – and a sincere desire to begin rebuilding credit for those Americans who no longer have the same options they were offered when their credit histories were in a more impressive state.
For many, the first step of re-establishing those credit scores means a prepaid credit card and all of the major carriers are rolling out new cards for just this reason. This option has proved to be that medium ground we all hear so much about. And it’s a good place to start.